Why We Like Middle Options, Small Menus

Many say that consumers are biased to prefer the middle of three options, and to buy less when offered more options.  In the latest American Economic Review, Emir Kamenica shows these need not be biases:

Numerous studies demonstrate that seemingly irrelevant factors influence people's decisions. … when three alternatives are available, the middle alternative is chosen more often than when it is paired with only one other option. … In choice overload experiments, customers are less likely to make a purchase if more products are added to the choice set. …

In this paper, I develop a model where uninformed consumers learn payoff-relevant information by observing what goods are available. The tendency to select the middle option thus naturally arises when there are consumers who are unsure which option is best for them, but know their tastes are middlebrow. Choice overload comes as no surprise if excessive product lines reduce consumers' information about which varieties are likely to suit them. …

The idea is straightforward: in a market setting, a consumer's knowledge of her relative position in the distribution of tastes is sufficient for identifying the optimal good if she can observe the entire product line. When fixed costs exclude some goods from the product line, however, the reduced menu provides worse information and forces the consumer to choose based on her prior. This leads to an inconsistency between choices from a smaller and a larger menu. …

When many consumers are uninformed, the firm may try to manipulate consumers' beliefs through the set of varieties it offers. In particular, I establish that the firm may introduce premium loss leaders – expensive goods of overly high quality which, though unprofitable on their own, greatly improve the demand for other goods. …

An uninformed consumer can be better off with a smaller choice set. The logic behind this possibility is as follows. A consumer who does not know which variety she likes must choose randomly among the available varieties. In equilibrium, the most popular varieties are introduced, so the average popularity of the available varieties is decreasing in the breadth of the product line. Consequently, the uninformed consumer's expected surplus is greater when there are fewer options.

I expect this actually does explain a lot of this sort of consumer behavior. Choice sets really do typically contain info that we quite reasonably notice. Kamenica's other papers are interesting too, including these speed dating results:

Women put greater weight on the intelligence and the race of partner, while men respond more to physical attractiveness. Moreover, men do not value women's intelligence or ambition when it exceeds their own. Also, we find that women exhibit a preference for men who grew up in affluent neighborhoods. Finally, male selectivity is invariant to group size, while female selectivity is strongly increasing in group size.